A comeback kid of sorts, Newark has begun a promising transformation over the past decade. The nation's third-oldest city was once a thriving industrial hub in the 1800s, but as manufacturing became increasingly decentralized, the local economy soured and poverty skyrocketed, especially for the city's growing (and politically underrepresented) African-American population. Devastating race riots ensued in 1967, and hundreds of businesses were destroyed.

From 1950 to 1990, Newark's population plummeted 37%. Although huge increases in state aid for education and a strong national economy helped stop the bleeding in the '90s, Newark's recent turnaround can be attributed to one thing -- location, location, location. And that can't be overlooked in today's red-hot real estate market.

Situated between New York and Philadelphia, Newark's multiple train and bus lines provide easy access to these metro hubs. Newark's Liberty International Airport is just a 15-minute drive from downtown. And the city boasts one of the East Coast's largest seaports. In a project due for completion in 2014, its channel is being deepened to 50 feet, which should substantially increase freight traffic.

CELLOS AND GOALIES. These geographic advantages helped convince large corporations like Verizon (VZ) and Prudential (PRU) to maintain a presence in the city, and with them has come a surprising cultural resurgence that has in turn made Newark attractive to entrepreneurs in search of a place to set up shop.

Opened in 1997, the New Jersey Performing Arts Center (NJPAC) now boasts the nation's fourth-largest arts-education program in the country and has drawn close to 4 million visitors for concerts by Lauryn Hill, Yo-Yo Ma, and everyone in between. The New Jersey Symphony Orchestra and Newark Museum are additional cultural draws. Sports fans also have a place to turn -- the Newark Bears, a minor-league baseball team now in its eighth season, and the National Hockey League's New Jersey Devils, which will make their home in a new $310 million arena, set to open in 2007.

With more and more of the estimated 45,000 students and faculty from Newark's five colleges and university's choosing to settle in the city itself, a vibrant social scene (and the small shops and restaurants that come with it) is beginning to emerge. "There are great opportunities in existing old buildings in the city to open small businesses," says Joel Freiser, director of the Newark Office of the Urban Enterprise Zone.

UNEVEN REVIVAL. Recent legislation makes it easier to get clearance to build on previously contaminated land, and apartment complexes -- many including luxury units -- are springing up on these once-rundown properties. Prices are often one-third less than at comparable Hoboken and Jersey City properties, and are half of those in Manhattan, which is just 20 minutes away by train.

Since 2000, Newark's population has been steadily growing (the first time since the '40s), and it shows no sign of slowing down. In 2004, Newark jumped 70 places, to No. 39, on the Milken Institute's Best Performing Cities list, which measures a number of economic factors, including job growth.

However, the renaissance has not been felt in all corners. A worrisome 23.5% of all households had an income of less than $10,000 in 1999, and 10% of Newark's citizens were still beneath the poverty line in 2003. While programs like the Newark Alliance work toward creating jobs for residents, old wounds are hard to heal.

"The truth of the matter is it takes a long time, especially because Newark had suffered for so many years with the post-traumatic effects of the 1967 riots," says Jeffrey Norman, vice-president for public affairs at NJPAC. "Pretty much anybody who could get out of the city left it. The perception has been the first thing to overcome." Although revitalization certainly hasn't come overnight, Newark is working to change its image one step -- and one small business -- at a time.

Thursday: A conversation with Jack Schultz, author of Boomtown USA.

Friday: A look at one thriving company and where it's choosing to expand. Plus: a slide show spotlighting some of the nation's most innovative small-business cities.